WELCOME TO ARE 012

Introduction to Agricultural Economics

With
Herman Sampson

Remember, my office is 4332 Nelson Hall, and my phone number is 515-4676.

If you have questions, please do not hesitate to come by the office, call or
reach me via e-mail. The syllabus let’s you know when I am in class or lab,
and when I am usually in my office. I am on several committees, and am often
active with student organizations. These activities often require that I be out
of the office at certain times during the semester. I will try to let you all know
when I will not be in my office. If you call and my voice mail answers, please
leave a message. If my phone rings once or twice and voice mail picks up, I
am in the office talking on the phone to a student, alumni, colleagues, or
perhaps family. If my phone rings four or more times and voice mail answers,
I have stepped out of the office for a moment to get a soft drink or go to the
rest room. Please leave a message.

My e-mail address is: herman_sampson@ncsu.edu

That little dash thing between my first name and last name is called an
“underscore.” You press the “shift” key and hold it down, then press the
“dash” key. That “dash” key is located next to the “zero” key on my
keyboard.

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 Microeconomics: ( the “trees”)
Studies economic behavior of individual
decision making units such as,
u Consumers
u Resource Owners
u Business Firms (producers)

in a market economy
At times, micro will study economic
behavior at the industry level 2

Associate microeconomics with the individual “trees” in a very large forest.

Some of the “trees” are known as consumers, some can be referred to as
resources owners, and some can be called business firms. Microeconomics
studies the behavior of these individual “trees” that we also consider to be
individual decision making units.

Microeconomics can also study “clumps of trees” that we can refer to as a

group of consumers (ie. African-Americans between the ages of 18 to 25), a
group of business firms collectively known as an industry (ie. the swine
industry in North Carolina), or a group of resource owners (ie. farmland
owners in North Carolina).

Of course, these broad classifications do overlap each other. Virtually

everyone in our economy is a consumer of goods and services, and we shall
learn that we are all resource owners as well.

When we visit a grocery store and purchase items, we are considered

consumers. When we sell our physical and mental abilities to employers, we
are resource owners. When we produce a good or service and sell it for a
particular price, we are considered producers. So it is possible for an individual
to be all three!

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 Macroeconomics: (the “forest”)
Studies the aggregate level of economic
activity,
u Economic system’s value of total
output: GDP
u Level of National Income
u Total Level of Unemployment
u General Price Level of the Economy:
Inflation
3

Associate macroeconomics with studying the “forest” as a whole. We can

study the “general health of the forest”, the “general growth rate of the forest”,
determine which portions of the “forest” might be having some
trouble(disease, or pest problems). Rather than looking at individuals (trees),
or small groups of individuals (clumps of trees); macroeconomics focuses on
how well the economy as a whole is functioning and in what direction the
economy may be heading.

We measure the economy’s value of total output, or Gross Domestic Product

(GDP), from year to year to determine if the U.S. economy is expanding
(growing) or contracting (shrinking). GDP is the monetary value of all the
goods and services produced within the boundaries of the U.S. Therefore,
GDP is the value of the production of all U.S. companies producing goods and
services (G&S) within the U.S., as well as all foreign owned companies
(Honda for example) that produce G&S within U.S. Think about it. Foreign
owned companies hire U.S. workers to produce their goods and services.

Economists like to see the U.S. economy grow at what is called a

“sustainable rate” believed to be around 2.5% to 3.5% per year. Some
economists believe that if growth exceeds 2.5% per year for very long,
inflation will occur. Other economists currently believe that the sustainable
rate of economic growth for the U.S. is greater than 2.5%. As the economy
grows, new jobs are created and unemployment rates tend to decrease.
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 Real GDP Growth (Percent)

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Percent Real GDP Growth

0
90 91 92 93 94 95 96 97 98 99 2000 2000
1st 2nd
-1 QTR QTR
Year
4

The graph above illustrates real gross domestic product growth from 1990 to
the second quarter of 2000. Think of real GDP growth as one of the “vital
signs” of the economy. Think about when you visit a doctor’s office. Once
you get into an examination room, a nurse usually takes your temperature,
checks your heart rate and blood pressure. These are your vital signs. Well,
economist use real GDP growth as one of the “vital signs” to monitor the
health of the economy. The dip in real gross domestic growth below zero
indicates the 1990-91 recession that occurred following the Gulf War. A
recession is defined as two consecutive quarters of negative growth in real
gross domestic product. Since the 1990-91 recession, real growth has been
above 2.5% for most of the current economic expansion. The “sustainable”
growth rate is derived from two factors, the U.S. growth in population and
U.S. productivity growth. Productivity is measured as economic output per
hour of labor. Historically, population growth has been averaging 1.0% and
growth in productivity has averaged 1.5% per year. The sum of these two
measurers provides the “sustainable” growth rate for the economy. But,
during the 90’s computer technology has become more integrated into the
economy and has enhanced productivity growth. For the 90’s productivity
growth has averaged well above the 1.5% historical benchmark and has
allowed the economy to grow at faster rates without major trouble from
inflation. So, many economists believe that the current economy can grow
faster than the previously believed 2.5% without inflation worries. But, the
question is, how long will the economy enjoy these larger than historically
normal increases in annual productivity?
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 National Unemployment Rate

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Unemployment Rate (%)

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Jul-90

Jul-91

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Jul-00
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Jan-96

Jan-97

Jan-98

Jan-99

Jan-00
Month/Year 5

The national unemployment rate is another “vital sign” of the U.S. economy.
Full-employment in the economy is generally accepted to by 5.0%
unemployment. Unemployment rates below 5.0% tend to result in increased
pressure on inflation due to wage increases as producers compete with each
other to find qualified labor to expand production. From 1992, the national
unemployment rate has been generally decreasing, even dipping below 4.0% to
3.9%. Again, our friend, productivity growth has been the “pressure relief
valve” for inflation pressures. Enhanced productivity allows workers to
produce more within the same hour of work, so employers can afford to pay
workers more without having to try and pass the increased labor cost on to
consumers in the form of higher product prices. For example, let us assume
that the wage rate at a furniture factory is $10.00 per hour and 4 employees at
the furniture factory can produce a two reclining chairs per hour. Labor cost
per reclining chair is $40.00/2 chairs or $20.00 per chair. Now, let us increase
the wage rate to 14.00 per hour and introduce new technology that allows the
four employees to produce three chairs per hour. What is the labor cost now
per chair? $56.00 / 3 chairs or $18.67 per chair. So even though the wage rate
increased, the labor cost per chair decreased due to increased productivity
pursuant to the use of new technology. In this case, the productivity gain may
allow for increased profits, or possibly lower prices to consumers. So today,
even the 5.0% unemployment “benchmark” is being questioned. But again,
will productivity growth continue at its current pace?

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 Industrial Capacity Utilization Rate

85

84

83

82

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Capacity Utilization Rate

80

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74
Jan-90

Jan-91

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Jan-00
May-90

May-91

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May-00
Sep-90

Sep-91

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Sep-98

Sep-99
Month/Year
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Above is the industrial capacity utilization rate. A mouthful to be sure. This

“vital sign” uses an 85% industrial capacity utilization rate as its “benchmark”
Economists believe that rates above 85% tend to be inflationary. Rates above
85% tend to cause production costs to escalate as we are pushing our economic
engines to the “red line.” Think of the engine in your motor vehicle. It has an
rpm range that is most efficient in terms of the inputs that produce power, gas
and air. If you have a tachometer on the dash board, you will notice a “red
line.” Sure, you can rev that motor to the red line and above, but how long
with that motor last if you are constantly running it to the limit? Gas
consumption starts to increase rapidly as greater demands are placed on that
engine. What will happen to operating costs of that motor vehicle if you are
constantly squeezing every horse power out of that engine? They are going to
go up, not to mention all the speeding tickets you will acquire. Well a factory,
a computer, a business has a “red line” as well. Machinery breaks down,
people get tired, irritable, sick, etc. At the “red line”, productivity starts to
decrease and costs begin to increase. So, 85% industrial capacity utilization is
thought to be the “red line” for our economic engines.

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 Work-Force Productivity:
Output per Hour Worked

4
Percent Increase

0
90 91 92 93 94 95 96 97 98 99 2000 2000
1st 2nd
QTR QTR
Year
7

Above is work force productivity or economic output per hour worked with
respect to human labor. The productivity gains from 1996 to the second
quarter of 2000 have been the “safety valve” that has relieved inflationary
pressures on prices in the economy. As I have remarked before, we do not
know how long these productivity gains will remain at higher than historical
levels. When will computer technologies be fully integrated into the
economy? What new technologies are in the pipeline that will continue to
allow us to produce more with the same amount or fewer resources?
Productivity growth is an important “vital sign” that economists will have to
continue to monitor.

And you thought the human body was a complex, dynamic system. Well the
economy is a pretty complex, dynamic system as well. The general economy
(macroeconomics) gets sick too. Businesses and consumers get economic
disorders as well (microeconomics). And, economist can prescribe
medications as well. For the general economy, lower or higher interest rates,
lower or higher taxes, more or less government spending are medications use
for when the economy is “too hot” or “too cold.” If the “economic doctors”
misdiagnose the cause of an “economic illness,” a recession or a terrible bout
of inflation could occurs as a result of prescribing the wrong “medicine.”

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 Macroeconomics: (the “forest”)
we will deal with some macroeconomic
topics first, then concentrate on
microeconomics

During the first few weeks of class, we will discuss some very general
economic principles, and then tackle some macroeconomic concepts, and
popular issues such as a balanced federal budget. We hear folks complain all
the time about the federal budget, and suggest that balancing that budget is
very simple. We also hear folks talking about how they do not understand how
the government can spend more money than it brings in through tax revenues.

Well, you are going to get your chance at balancing the federal budget. We
will also discuss public debt, such as the federal deficit and the national debt,
and compare that to the nation’s private debt. Private debt is the amount of
money most of you and I owe on credit cards, auto loans, mortgages, etc.

We will find that many of our fellow citizens have difficulty balancing their
own budgets.

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 Normative Economics:
Normative: subjective, value laden,
emotional

“What ought to be” economics

Rx and/or Policy oriented

Hear a bunch of normative economic

statements during political elections 9

Before we get to some of those topics, we need to distinguish two other

branches of economics. Normative and positive economics. Normative
economics tends to be subjective, value laden, and emotional in its
presentation. Normative economics is often referred to as “What ought to be”
economics. “We ought to do this,” or “we ought to do that.” Normative
economics is “prescription” and/or policy oriented. During political elections,
we hear a great deal of normative economics from the candidates for office.
Every four years a new person comes along that claims they have the answer
to all of the our country’s economic problems. “We should raise taxes.” “We
should lower taxes.” “The rich do not pay enough taxes.” These are all
normative economic statements.

“That person is hungry, we have to feed them.” Again, a normative statement.

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 Positive Economics:
Positive: Objective, without emotion or
value judgment!

“What is, What was, What will be”

economics

Based on probability and statistical

methods
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A branch of economics that I personally try hard to ascribe to is “positive

economics.” Positive economics is objective, without emotion or value
judgements. Positive economics can be referred to as “What is, what was, and
what probably will be” economics. Positive economics is based on sound
economic theory, probability, and statistical methods. Positive economics
studies and determines the probable outcomes from an increase or decrease in
taxes. Positive economics does not prescribe that taxes should be increased or
decreased. That decision is for the people of our democratic society to evaluate
and decide through their duly elected political representatives. Positive
economics provides only the probable outcomes of alternative decisions. It is
assumed that an educated society will make the most rational choices for
themselves, and exercise those choices in the marketplace.

Positive economic analysis strives to explain current economic phenomena as

well as answering "what if" type questions without value judgements.

“That person is hungry.” What is the cost of feeding that person? What is the
benefit that you or society will accrue if that person is fed? What is the cost of
not feeding this person? What is the benefit from not feeding this person?
Positive economics tries to objectively answer these questions by doing what
is called a cost/benefit analysis.

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 Microeconomics
Normative microeconomics
Positive microeconomics

Macroeconomics
Normative macroeconomics
Positive macroeconomics

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As you can see, economics can be basically broken down into two major areas
of study, microeconomics and macroeconomics, with each major area being
further divided into a normative or positive perspective.

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 Macroeconomics
1. Fiscal Policy:
Govt. tax and spend policies

2. Monetary Policy
Manipulation of the money supply by
the Federal Reserve system to affect
short-term interest rates and control
inflation
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From a government policy perspective, macroeconomics focuses on two

primary issues:
• Fiscal Policy, which deals primarily with the amount of government
spending and taxation. The Federal Budget is basically the
government’s taxation and spending policy.
• Monetary Policy, which is controlled by the Federal Reserve
currently chaired by Alan Greenspan. The monetary policy of the
Federal Reserve affects short-term interest rates directly; and inflation
and long-term interest rates indirectly. The current priority of Mr.
Greenspan is to keep (inflation) in check.

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 Private Property Rights
“Negative Externality”:

When you produce or consume a

commodity or service within your
private property rights that imposes a
cost on a third party not directly
involved in the market transaction.

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In a competitive market system such as ours, property rights have been

established to facilitate the exchange of commodities, and reduce the resources
required to protect private property. Property rights are often constrained by
the enactment of legislation due to the realization of a “negative externality”

The best way to explain this concept is through an example. Lets take a look
at second hand smoke. A person has bought a pack of cigarettes. The
cigarettes are now their private property. They pull out a cigarette in class,
and start smoking; exercising their right to use their private property.
However, a member of the class has asthma. This student begins to have
labored breathing associated with the onset of an asthma attack. I have to stop
class and call public safety to transport this student to the ER for treatment.
Another student in class is allergic to cigarette smoke. Their eyes start
watering, their nose becomes congested, and they are generally uncomfortable
and find it hard to concentrate in all their classes the rest of the day.

The smoker has imposed a negative externality on these two individuals and
the class as a whole while exercising their private property rights.

Another example would be a producer that pollutes the environment.

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 Private Property Rights
The cost imposed on the third party is very
difficult (expensive) for the third party
to recover

AKA a “Spillover Cost”

14

What was the cost on other people for the smokers right to smoke?
Class had to be stopped to take care of the student with asthma, so everyone
missed a lecture they had paid for. The student with asthma misses the rest of
his/her classes, and has a hefty emergency room bill (the most expensive form
of medical care available) that he/she or their insurance company must pay.
Remember, health insurance companies extract premiums from their
customers. As health care costs increase, very often insurance premiums
increase as well. The student with the allergy is generally miserable.
The smokers rights have infringed on the rights of others, and it is very
difficult if not impossible for the others to recover their damages from this
smoker. Thus, legislation is passed that forbids the consumption of cigarettes
in certain public areas to resolve this negative externality.

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 Private Property Rights
Laws are often enacted by legislative
bodies that constrain private property
rights in order to rectify negative
externalities, or at least reduce the cost
to third parties in recovering damages

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An individual’s recourse in the matter of a negative externality is usually a

civil law suite such as the one filed by airline stewardesses against the tobacco
companies in 1997. Lawsuits can be very expensive for individuals and
society but they are a means of recovering damages imposed by another’s use
of their private property.

Aug, 1996, FDA classified nicotine as a drug and proposes increased

regulations on the tobacco industry to reduce the incidence of teen age
smoking. This FDA action precipitated the law suites filed against tobacco
companies to recover costs associated with treating smokers under the
Medicare and Medicaid programs. All of this in response to a negative
externality.

The recent outcries by some citizens of North Carolina and the national news
media stem from a perceived negative externality. Some people are accusing
the swine industry of N.C. of contaminating their ground water supplies with
excess levels of nitrogen. Others are claiming that the odor from swine
facilities has decreased the value of their homes and land resources that they
own. As a result, calls for new legislation have surfaced. The N.C. legislature
in 1997 considered a two-year moratorium on the building of any new swine
facilities until research studies could document any problems or not.

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 Negative Externalities
Some Examples:

Seat Belt Crack Down in N.C. (Click It

or Ticket)

California Helmet Law for Motorcyclists

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Let’s take a look at some other examples of negative externalities. The seat
belt law has provoked many people to question whether government has a
right to tell them they must wear a seat belt in an automobile, or wear a helmet
on a motorcycle. The negative externality arises because of the scientific data
that informs us that people involved in auto accidents that wear seat belts have
less injuries than those that do not wear seat belts. We have also been
informed that seat belts reduce fatalities associated with auto accidents.
Society very often must pay for these injuries and deaths through tax dollars
because many of the persons involved in these accidents do not have ample
insurance coverage. Think about the medical bills, time missed from work,
disabilities, and the care to be given to children that may be left behind in the
event of the death of a parent. The social burden can add up quickly.
Of course, the same argument can be used for a motorcycle helmet law.
Have you ever heard someone’s head hit the pavement, and see the head
trauma that occurs? Buy a cantaloupe and give it a hurl onto the pavement one
day for a graphic visualization. We have the technology to keep virtual
“vegetables” alive today for an extended period of time. Who pays for this?
Another problem: Federal Highway money is tied to seat belt compliance. If
a lot of people choose not to wear their seat belt, Federal Highway Funds are
cut off. Will state taxes be increased to meet the highway needs of N.C.?
How will you feel if your state income taxes are increased because a large
group of citizens choose not to wear their seat belt? What if you are a highway
construction worker that gets laid-off because of the loss of Federal Highway
Funds 16
 Negative Externalities
Possible Solutions:

– Pass Laws

– Post Bond to assure financial responsibility

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A solution: laws are passed mandating that citizens wear a seat belt and
children up to a certain age and weight be confined to approved restraint
devices.

Another solution: post bond sufficient to cover your financial responsibilities,

then you can do as you wish with regards to a seatbelt or motorcycle helmet.
Otherwise, you may be asking society to bear the burden of your decision to
not utilize safety devices while operating a motor vehicle in the event of an
accident.

I have presented to you some perspectives that you may not have previously
considered. What do we do? What course of action do we take to alleviate
this negative externality? That is up to you to express to political
representatives. True, we are sacrificing some personal freedom if we pass a
law mandating seat belt or helmet use (cost). What is the benefit from doing
so? What will be the net benefit? What if we don’t pass any laws (cost) that
constrain personal freedoms (benefit)? What is the net benefit of this
decision?

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 Negative Externalities
Some Examples:

Imperial Foods of Hamlet, N.C. vs.

Imperial Sandwich Co. of Goldsboro,
N.C.

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Another example of the obvious affects of a negative externality, and an

example of the not so obvious affects can be derived from the Imperial Foods
incident in Hamlet, N.C. In 1991, the owners of Imperial Foods padlocked the
fire exits of the food processing facility because of product losses that were
alleged to be taking place. In other words, employees were alleged to be
carrying “stuff out the back door.” A fire occurred within the plant, and I
believe 28 people lost their lives due to the fire exits being locked. The
obvious recourse here was to pass more stringent inspection laws and hire
more inspectors.

The not so obvious negative externality was born by a small sandwich making
company in Goldsboro, N.C. named the Imperial Sandwich Company. These
two companies were not associated with each other in any way. The only
thing they had in common was a similar name. As are result of the Imperial
Foods fiasco, Imperial Sandwich Company received numerous phone calls and
letters that were not flattering. Businesses that confused Imperial Sandwich
Company with Imperial Foods; canceled orders. Convenient stores refused to
do business with them anymore. Imperial Sandwich Company quickly faced
financial problems. The company was salvaged only after changing its name
to disassociate itself from Imperial Foods. How does Imperial Sandwich
Company recover its loses due to Imperial Foods lack of rational behavior?
We have a negative externality.

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 Positive Externalities
When you produce or consume a
commodity or service within your
private property rights that bestows a
benefit on a third party not directly
involved in the market transaction.

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As you recognize, a positive externality is just the opposite of a negative

externality. And again, an example is the best way to explain this concept.

Let us assume that you own a home in a sub-division of Raleigh. You spend
thousands of dollars landscaping and maintaining your home site. You
maintain your house very well. Your neighbor is one of those folks who just
does the minimum. His/her place looks O.K., but it is not on the Parade of
Homes list. Do your actions increase the value of your neighbors home? If
he/she were to place their home on the market, would the potential buyer look
around at neighbors homes and the neighborhood in general?

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 Positive Externalties
The benefit bestowed on the third party is
very difficult (expensive) for the third
party to recover

AKA a “Spillover benefit”

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I think you would agree that you have added value to your neighbors home.
Now how will you get that value added to your neighbor’s home when he/she
sells it? Will you politely ask for your share at the closing? What is your
neighbor likely to tell you? Thus we have what is known as a positive
externality.

Now assume you have a neighbor that does not maintain their home site well
at all. Your neighbor has junk cars in the back yard on cinder blocks, a goat
running around grazing the over grown crabgrass in the yard, and paint peeling
off the siding and trim. This would probably diminish the value of your well
kept home (negative externality). How would you recover this loss?

Do you now see the rationale behind the development of “Homeowners

Associations”, and restrictive covenants that are placed in real estate deeds.
These legal instruments are used to preserve and maintain the value of homes
in sub-divisions. Zoning ordinances and municipal land use plans are other
legal prescriptions for preserving or enhancing real estate values.

Another example of a positive externality is EDUCATION. Higher education

leads to increased GDP (economic growth) and lower crime rates.

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